A State of Bondage

California is broke. The largest state in the Union can't pay all of its employees, its vendors, or us, the taxpayers. It's hard to imagine that California, which, if it were a country, would be the 7th largest economy in the world, could get itself into such a mess. Obviously, there are a number of contributing factors to the predicament that California finds itself in - anything from employee contracts, to pension fund liabilities, to required spending thresholds. Another, however, is the state's increasing reliance on bond measures to finance project, especially public works projects.

It wasn't always this way. There was a time when California was forward thinking, looking ahead at projected population growth, and allocating funds to improve the infrastructure necessary to support its burgeoning citizenry. In the 50's and 60's, California's roads and schools were the envy of the country. Unfortunately, this is no longer the case. Anyone living in the Golden State today can attest to the fact California has now lost its race to keep the infrastructure ahead of its population growth.

As of December 1, 2008, California has on its books, $56,944,224,000 in existing bond obligations, with the approval from voters to issue nearly the same amount ($56,823,816,000) in additional bond issues. This does not include any of the myriad of bond measures that passed on the November ballot. Fortunately, the ability to issue bonds does not require that they be issued, so there is hope that the state will not use the entirety of its line-of-credit. Since 1960, the state has been authorized by voters to issue $141,362,000,000 in general obligation bonds. Approximately 2/3 of the debt has been issued, with about 60% of that amount still outstanding.

This year, estimates have California running some $42 billion in the red. Between the housing slump and the sagging economy, state revenue is down. In the middle of a national fiscal emergency, California voters approved another $9.95 billion for a high speed train between Northern and Southern California, $990 million for Children's Hospitals, and $900 million for aid to Veterans.

Don't get me wrong, these may all be good things, bond issues are always for good things like schools, roads, libraries, police, fire and the like. Hey, who is against those things - certainly not me. The problem is, money is fungible. Does anyone think that if a school bond is not passed, there will not be any money for school improvements? What happens is, because a new source of funds has been found for improving schools, the money that would have gone for schools can be moved to other projects. This is key. When you vote for a bond measure, you are not just voting on the projects that the bond is used for, you are also voting for all the other projects that will be funded with the money that would normally have been allocated to that project.

There's evidence for this, too. In 2002, we passed the Kindergarten-University Public Education Facilities Bond Act of 2002 (K-12) , which authorized $11.4 billion in bonds, with $1.5 billion of this amount yet to be issued. Then, in 2004, we passed the Kindergarten-University Public Education Facilities Bond Act of 2004 (K-12) , which authorized another $10 billion in new bonds. We have issued $7 billion of this, with another $3 billion available. One might think that was enough, but, in 2006, we passed the, you've got it, Kindergarten-University Public Education Facilities Bond Act of 2006 (K-12) - another $7.3 billion, again with $3 billion unissued. This is not an outlier, either. There were New Prison Construction Bond Acts in 1986, 1990 and 1992; Veterans Bond Acts in 1982, 1984, 1986, 1988, 1990, 1994 and 2000; California Safe Drinking Water Bond Laws in 1976, 1984, 1986 and 1988, Clean Water Bond Laws in 1970, 1974 and 1984, a Clean Water and Water Conservation Bond Law in 1978 and a Clean Water and Water Reclamation Bond Law in 1988. I could go on. Why would we need the ability to borrow millions upon billions of dollars, year after year, in consecutive election cycles? Perhaps because the real reason was to free up dollars for other projects.

There's another problem, too - Prop. 13. Prop. 13 isn't going anywhere, nor should it. The problem is in the juxtaposition of the requirements of Prop. 13 and the requirements to pass a bond measure. Because it takes a 2/3 majority to increase taxes, it is much more difficult to increase revenue through a tax increase than it is to increase revenue, through debt, by passing a bond measure. But here's the thing about debt - it reduces your capacity for future expenditures because of the interest you have to pay in addition to the principal. Sure, because of inflation, we pay back our debt in dollars that are worth less than the ones we borrowed, but that merely reduces the cost, it doesn't eliminate it. And if this recession worsens, we could end up in a deflationary period, where we would potentially pay debt in dollars worth more than the ones that we borrowed.

I propose that we pass a new initiative in California, a companion to Prop. 13, that would bring the requirements to pass a bond measure more in line with what it takes to raise taxes. My preference would be to make the requirements the same - a 2/3 majority, but I would settle for 60%. In the case of the three initiatives mentioned above, only one of the three would have passed the 60% threshold. The Veterans Bond Act of 2008 passed with 63% of the vote. The High-Speed Train measure received 52.5% of the vote, while the Children's Hospital Bond Act received 55.1%.

How many of us can go to the store and buy without looking at the opportunity costs inherent in a budget? Within any budget, there are choices to be made, if you purchase one thing, it means that you don't have the funds to purchase something else. When we vote on bond measures, we don't have enough information. We don't see everything that is on the table. All we see are schools and roads and clean water, and we think to ourselves, "yeah, we need that." This is the job that we pay our elected representatives to do for us, and we usurp their responsibility at our own peril.